Vietnam’s Automobile Industry after TPP

The current status quo of elevated car prices for the Vietnamese population proves that Vietnam is still “beating around the bush” related to the burdensome import tax policies. This inactivity greatly affects the local market car price to be 3 or 4 times higher than that in more developed countries such as France, the U.S. and Japan. To the Vietnamese people, the automobile price in the local market ranks number one as the most expensive item compared to the price of a car produced in the local market. The price of an automobile in Vietnam is higher than USD 15,000 with an additional USD 1,000 per year added for taxes and toll fees. This ranks the price of an automobile as 3rd after the U.S. and EU.[1]

Historical Trade Agreements

Following the commitment of the ASEAN Free Trade Agreement (AFTA), after 2018, the automobile import duty will be reduced to 0% for participating countries, signaling an opportunity for the Vietnamese people in that they will benefit from this reduction by purchasing new models of automobiles. This will allow the Vietnamese people to participate in automobile trends other countries benefit from. However, until then this will pose challenges to the Government up to the implementation of the 2018 agreement, as the people struggle to purchase automobiles. If the government does not take heed and push forward on remedying this situation, the improvement in many aspects for the entire car industry (i.e. assembly, spare parts, manufacturing and production will be negatively impacted right in their home market. The current dependency on imported automobiles has put a tremendous burden on the local car industry, and negatively impacted the pocketbook of the Vietnamese population.

Agreements and Content Requirements

Specifically, according to the Ministry of Finance statistics, a large Japanese car manufacturer in Vietnam reached only 7% while committed of at least 30%, Suzuki 3% and Ford VN 2%.

There have been 15 joint-venture investment licenses granted since 1997.

Export and Import of Cars in 2014

After many years of low automobile imports, the imported quantities in 2014 reached more than 71 thousand units, noting an increase of 102.3% compared to that in 2013. The average imported unit price noted an 8.4% hike; therefore import turnover reached 1.58 B USD, a tremendous increase of 119.2%.

An uptick taking place for 9-seat cars or smaller ones reached more than 31 thousand units a hike at 104%; trucks at 27.3 thousand units, a significant increase of 64.3% of more than 12 thousand units and an incredible increase at 305% compared to that of 2013.

Automobiles in TPP’s commitment

The Trans-Pacific Partnership (TPP) recently completed their long-driven negotiation rounds on 6 October 2015 where all members reached consensus about local content requirements for the automobile industry and the associated tax benefits.

“It was agreed during the TPP negotiations that the tariffs on more than 80% of auto part items exported to the United States would be abolished immediately after the TPP takes effect. The tariff rate on those parts is currently averaging 2.5%. It was also agreed that Canada will abolish its import tariff on fully assembled cars, currently 6.1%, about five years after the TPP takes effect.” 5

According to my opinion, TPP has the potential to influence the local car producers by increasing imports, because the duty rates will be diminished. Once the Government issued the directive to the Ministry of Finance to tailor the policies and tariff rates to lower the cylinder capacity classification to accommodate the local market condition and customer’s preferences, this became a win for the Vietnamese automotive consumers. The remaining question is whether the car price will actually be cheaper when TPP takes effect.

Dr. Le Dang Doanh, the former Head of Central Institute for Economic Management said it would take a period of time for the Vietnam car industry to offer a lower price to the market. He added that import duty was one of the components added to the selling price, so in order to have a competitively lower price; the other components of the price of a car would also require evaluation after joining TPP. “On the other hand, the draft of new special consumption tax for small cylinder automobiles, lower price to the market will create severe competition between imported cars and local produced ones” he added.

Conclusion

To positively impact the Vietnam market, it will take time to rely on the reduction of import duties, the special consumption tax, and other fees when implementing TPP.

According to Mr. Nguyen Duc Thanh, the Head of Economic and Policy Study Institute the Vietnam automobile industry will not be negatively affected by TPP initially. Based on a report by the Vietnam Development and Investment Banking Security Corporate, the only import turnover from Japan and the USA market now occupies 13% of total car imports. Whether the TPP imports of automobiles from these countries will increase exponentially, this still remains to be seen.

In a nutshell, the Vietnam car industry has the potential to be significantly affected when the TPP becomes effective for the consumer with lower prices, and to the manufacturing environment by greater competition from imports.